The public got a bglimpse of an unedited report on Bear Stearns failure because Senator Charles Grassley put the full version on the Internet briefly. The official version had significant deletions. From Bloomberg (hat tip reader Alex):

U.S. Securities and Exchange Commission Chairman Christopher Cox’s regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos., according to an unedited version of a study by the agency’s inspector general.

The report, by Inspector General H. David Kotz, was requested by Senator Charles Grassley to examine the role of regulators prior to the firm’s collapse in March. Before it was released to the public on Sept. 26, Kotz deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency’s Division of Trading and Markets that oversees investment banks.

“People can judge for themselves, but it sure looks like the SEC didn’t want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior,” the Iowa Republican said in an e-mailed statement.The report, by Inspector General H. David Kotz, was requested by Senator Charles Grassley to examine the role of regulators prior to the firm’s collapse in March. Before it was released to the public on Sept. 26, Kotz deleted 136 references, many detailing SEC memos, meetings or comments, at the request of the agency’s Division of Trading and Markets that oversees investment banks….

“People can judge for themselves, but it sure looks like the SEC didn’t want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior,” the Iowa Republican said in an e-mailed statement….

The SEC, which governed the firm along with the Financial Industry Regulatory Authority, “failed to carry out its mission in the oversight of Bear Stearns,” the agency said in both versions of the report.

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I’m largely not sympathetic to political/partisan accusations in the context of this crisis, and god knows there’ve been plenty of those going around. But I will say, from what I have seen/heard, Christopher Cox’s entire team deserve to be at a special level of hell for their roles in this debacle.

Right, as if it was any sort of surprise that, in addition to all the other ingredients to this disaster, the SEC also screwed up royally. That sort of thing is what one would expect from the Bush administration: a hand-picked selection of people whose character makes them totally unfit for any sort of office, no matter how mundane.

The only thing that I’m wondering about is: would a working SEC have hat the power to change anything in, say, the past 24 months?

A recurring theme in this blog is that the whole financial landscape had become unsustainable over the past years, so having a working SEC would probably just have made the current deleveraging and shrinking of assets less painful. But not painless – the fundamentals were just not there for that.

To me, the SEC being corrupt and incompetent is just a thin layer of icing on the cake, but largely irrelevant for the main story.

"To me, the SEC being corrupt and incompetent is just a thin layer of icing on the cake, but largely irrelevant for the main story."

The SEC has made a whole lot of things much worse than they needed to be.

SEC made things worse by letting brokers increase leverage from 12 to 1, to over 30 to 1. The brokers failed in direct order from most leveraged to least, starting with Bear. The SEC also made things much worse by favoring banks to do securitization, as opposed to REITs and others reducing competition, and by favoring select ratings agencies by reducing competitors to S&P and Moody's (who might have been more honest Egan Jones sure is), and by not aggressively pursuing managements for spinning positive rumors and bogus mark to mark numbers to drive up stock prices.

The Republicans did move for more accounting and oversight for the GSEs but the Democrats shot it down in hearings. So, somebody was aware of misdeeds at the time. Others have been calling for this ending action that is occurring now for years.

The government was fully aware of the financial conditions starting at least with striking M-3 and the recent stimulus checks from the IRS out of the blue as they tried to prop the economy up.

Fractional reserve banking with compounding interest always end this way…inflate to infinity and die anyway…it shouldn’t be a surprise.

Funny, Kotz was mentioned in the NYT article today “Impartiality of SEC is Questioned”..that talked about a totally different problem about how he fired people for digging too deep into Pequot Captial.

A nice quote:

“Mr. Kotz’s report puts added pressure on an agency that has recently been accused of failing to aggressively regulate financial institutions at the heart of the subprime mortgage crisis.”

Imo, its that revolving door…SEC employees don’t want to jeopradize their own chances of getting a job at a high-powered hedgefund by making anyone look too bad…thats why they only publicly kick the snot out of small players.

My apologies, it was not Kotz that did the firing (he conducted the investigation into them)…it was “Linda Thomsen..Robert Hanson; and the assistant director of enforcement, Mark Kreitman” that were cited as possibly wrongfully firing the SEC employee.

whoa be me to defend acts of ommission or commission in the crisis. But the big picture is that we had a Minsky cycle. After 20 years of uninterupted moderation, group amnesia allowed everyone to start swimming naked… Until the tide went out.

It sure is easy after the fact to identify the recklessness and all that. I don’t deny the healing quality of finding blame, but I worry that we too easily place blame on the mechanical aspects, rather than soul searching on true root causes.

Banking is built on sand. Should we really put such high stock in the sand police?

SECs Cox is FEMAs Brown and in this Katrina moment, we need to see Cox fired and become a poster child for failed nepotism!

Cox represents a Soviet nuclear inspector at Chernobyl or an inspector of Space Shuttle Challenger, or a representative of collusion and corruption in this Ownership Society that was based on the foundation of fraud. This type of bastard should not have a license to drive his drunken friends on The Autobahn at 200 mph, while he snorts coke and plays chicken with the reality of a crisis.

These type of hooligans are the retards that have broken the casino banks and given us chaos and these pests need to be exterminated ASAP in order to begin a process of building confidence! If we don’t rid ourselves of these pests, our society will devolve into a ghetto!

You are 100% correct re Lieberman, this is very well described in Arthur Levitt’s book Take on the Street. He was reform minded (only modestly so, but even his modest aims were thwarted), a Clinton appointee, and got nowhere.

Also note he got just about no fancy directorships as a result (the usual retirement option for top regulators, which of course encourages a wink and nod attitude, another sign the industry was not happy with him), but to Bloomberg’s credit, he did give him a board seat

I seriously doubt that Congress "knew" in the carnal knowledge sense (sorry couldn't help it)…since from what I've seen, many of our congresspeople couldn't find their way out of a paper bag (reference c'span last week).

And then about this 'death penalty for crimes' uhm that would be genocide at this point dont'cha' think? And we know we would be no better than the machete wielding masses that we, on a good day, think we're better than.

“Without the death penalty for crimes of this magnitude we will have no justice, no peace. You think I’m joking?”

Death sentence for them, and big money for their heirs/charities is too easy. Just slap a one time 50% wealth tax on people with a net worth of over $5M who worked for a bank or fund or money management company at any point in the past 10 years, and raise capital gains taxes to ordinary rates for anyone with income over $250k.

Anonymous:The crime you are looking for is 18 USC 225, Continuing Financial Crimes Enterprise. It is a non- RICO crime, but seems to fit what I think are the facts.I am a CPA and in my less than humble opinion, the Cox SEC is the worst I have ever encountered. I so much prefer the competence and professionalism of the IRS, yes the IRS, over the SEC, you wouldn’t believe it.

YS:You are talking of “regulatory capture”. C. Walton Hamilton wrote The Politics of Industry, 1957, about just this. The book is a real eye-opener.

I keep saying there aint no conspiracy all the information is public yet no one cares. Heck, the PPT has been common knowledge forever and Warburg and Aldrich were not that clever or subtle. I feel sorry for those who believe but I truly feel bad for the naïve retirees whose savings have been destroyed under the presumption that they were acting prudently and Uncle Sam would not lie to them. I will say it again, GAAP, GDP, CPI and Unemployment are f…..ing lies. The cash trail and simple math never lie. ………………………………………………………………………………………………

Oct. 7 (Bloomberg) — U.S. Securities and Exchange Commission Chairman Christopher Cox's regulators stood by as shrinking capital ratios and growing subprime holdings led to the collapse of Bear Stearns Cos., according to an unedited version of a study by the agency's inspector general.……………………………………………………………………………………………“People can judge for themselves, but it sure looks like the SEC didn't want the public to know about the red flags it apparently ignored in allowing Bear Stearns and other investment banks to engage in excessively risky behavior,'' the Iowa Republican said in an e-mailed statement. http://www.bloomberg.com/apps/news?pid=20601109&sid=av2fpp3blAgY

“whoa be me to defend acts of ommission or commission in the crisis. But the big picture is that we had a Minsky cycle.”

If this commenter had bothered to read Minsky, he’d know that Minsky was an institutionalist, who believed in strong regulation, but regulation carefully tailored to suit evolving economic-institutional contexts. Minsky blasted the “shock therapy” program imposed upon Russia, correctly pointing out that none of the institutional conditions existed, by which it could possibly at all work.

The Fed is valuing the portfolio in accordance with accounting guidelines that call for an estimate based on sales in an “orderly market,'' rather than a hypothetical forced liquidation. The value doesn't necessarily reflect what the securities would fetch if Maiden Lane tried to sell today.

When the Fed agreed to the Bear Stearns transaction on March 16, policy makers also opened lending to other securities firms. That facility, and a $13 billion temporary loan to Bear Stearns after it warned it faced bankruptcy, constituted the first Fed credit to nonbanks since the Great Depression.

The Fed's loan carries the rate charged to commercial banks at the discount window, currently 2.25 percent.

The debt in March included commercial mortgage-backed securities, home loans and collateralized bond obligations, the central bank said in April. None of the securities were rated lower than BBB- by any of the three largest credit-rating companies, the New York Fed said April 3. Debt rated below BBB- has non-investment grade, or junk, status.

Market `Deterioration'

Today's valuation probably reflects “ongoing deterioration in these markets,'' said Sack of Macroeconomic Advisers. In addition, it may reflect more-extensive research into the securities' values, he said.

The central bank has declined to provide details on the securities and isn't planning to disclose changes in the makeup of the portfolio. The asset mix may change to include securities that weren't in the original pool.

Ooops, it's not really a pdf file and not searchable, but it is a nice big photocopy; guess they don't want people like me copying and pasting due diligence efforts relating to public information. This is obviously just a private matter between Paulson, Cox, Bernanke, Bear, JPM, Blackrock and all the people that want a few Trillion in socialized tax dollars, so they can get back to Aspen for XMAS!

I'll still look it over real fast, but I wondered why the doc was so huge! Boring, corrupt and pointless.

I am bewildered and a newbie for the board, and to the degree I can grasp much or sometimes little of these complexities, I am wondering among other things: what exactly has Paulson, Bernancke done with their own “savings” and “investments” – is it in trusts and blind or is there a way to find out. What a grande manner to guide our own futures and what would it reveal about the truth versus spin of Washington? All the best.

I agree that “Christopher Cox’s entire team deserve to be at a special level of hell for their roles in this debacle”.

But I think that team consists almost completely of Cox and his Republican co-commissioner Paul Atkins.

Those guys gutted the SEC through ethnic cleansing (eliminated 174 positions in the Enforcement Division in less than 4 years !) and suspension of any functioning rules. But they did have a sense of humor – they assigned only one SEC employee to be in charge of risk management analysis for all investment banks (you can’t make this stuff up).

The SEC has traditionally had first class, and generally ideologically-neutral, leadership. And attracted a hard-working, dedicated, and responsive staff.

But Cox and his team (collectively the Harriet Meyers of financial regulation) let lazy acceptance of a primitive political ideology trump common sense and their clear duty to their country.

Hamilton was the leading advocate of a constitutional convention to “amend” the nation’s first constitution, the Articles of Confederation. He lobbied for seven years to have such a convention convened, constantly complaining to George Washington and anyone else who would listen that “we need a government of more energy.” Patrick Henry opposed Hamilton by sagely pointing out that the Articles of Confederation had created a government powerful enough to raise and equip an army that defeated the British empire, and that that seemed sufficient to him.

At the convention, which scrapped rather than amended the Articles of Confederation, as had been promised, Hamilton laid out his grand plan: A permanent president who would appoint the governors of each state, and who would, through his state-level puppets, have veto power over all state legislation. A national government with the president given essentially the powers of a king is what he advocated. It was all rejected, of course, when the convention spurned Hamilton’s nationalism and adopted a federal system of government instead, with only a few powers delegated to the central government by the sovereign states, mostly for foreign affairs. Hamilton subsequently denounced the new constitution as “a frail and worthless fabric.”

He and his political compatriots, such as Senator Rufus King of Massachusetts, and John Marshall of Virginia, then set about to sabotage the new Constitution by “reinterpreting” the document as something very different from what was clearly written in black and white. His purpose, wrote Cornell University historian Clinton Rossiter in his book, Alexander Hamilton and the Constitution, was to build “the foundations of a new empire.”

Between 1937 and 1995, not a single federal law was ruled unconstitutional by the U.S. Supreme Court. Hamilton’s “rubber stamp” constitution was firmly in place.

Anonymous at 4:33 said:“The Republicans did move for more accounting and oversight for the GSEs but the Democrats shot it down in hearings.”

If you’re talking about the Federal Housing Enterprise Regulatory Reform Act of 2005 (or 2006 if you’re John McCain,) I was wondering how much was that actually an effort to exempt the GSE’s of SEC oversight and to move all regulation to the executive branch (instead of the house).

By the way, the Dems didn’t have the resources to “shoot it down.” They were in the minority and the bill cleared the committee.

In his book “Take on the Street”, Arthur Levitt Jr., former chairman of the Securities and Exchange Commission, portrayed Lieberman as a hypocrite. Levitt recalled that in 1993, the Financial Accounting Standards Board “voted unanimously to seek comment on a rule that would make companies put a fair value on their stock option grants and record that number as an expense. Corporate lobbyists, outraged by the FASB’s perfidy, persuaded Congress to hold hearings.” According to Levitt, Lieberman “led the charge. He introduced legislation to bar the SEC from enforcing the rule. In addition, Lieberman wanted to strip the FASB of authority by requiring the SEC to ratify each of its decisions, in effect relegating private-sector standards to mere recommendations. Lieberman didn’t stop there. He also sponsored a Senate resolution that declared the FASB proposal a cockamamie idea that would havegrave consequences for America’s entrepreneurs … While Lieberman’s bill did not pass, his resolution did—by an overwhelming 88-9 as an unmistakable signal that Lieberman had the votes to stop the FASB if it pushed ahead.

++++++++++++++++++++++++++++++++++++++++++++++=

INTERVIEW: Arthur Levitt

Chairman of the SEC from 1993 to 2000, Levitt says the Enron scandal is “symptomatic of a breakdown of the ethical values of business over a period of perhaps 20 years.” He is very critical of what he calls “accounting hocus-pocus” or how companies have become more creative in their interpretations of accounting standards. In this interview, he describes the political heat he took during the three big accounting battles of the 1990s, and calls for an independent agency with subpoena power to oversee the accounting industry. This interview was conducted by FRONTLINE correspondent Hedrick Smith on March 12, 2002.

You’ve been talking a lot about distortions of reality. Is the failure to expense stock options a distortion? Does that distort company income?

Yes. Investors should care deeply about expensing stock options, because those options represent a distortion of the earnings of the company. Right now, options are treated as a footnote, but that’s not good enough. Those options represent a claim on the company, and a claim that may very well and has been exercised.

So what you’re saying is stock options are a cost of doing business that businesses don’t show their shareholders?

Stock options are a cost of doing business that is not clear to many American investors.

[Prior to the Gingrich Revolution, what happened in the Senate regarding the FASB rule?]

The Senate passed a [resolution] about the proposal of the standard setter to expense stock options. Why did they do it? There was no question in my mind that campaign contributions played the determinative role in that Senate activity. Corporate America waged the most aggressive lobbying campaign I think that they had ever put together on behalf of this issue. And the Congress was responsive to that.

You have Sen. Joe Lieberman of Connecticut leading the charge. Why?

I don’t know. I honestly don’t know. Sen. Lieberman is my own home senator, and I have great regard and respect for him. I’ve spoken to him about this issue a number of times. And I simply do not understand where he’s coming from.

What were his arguments?

The arguments were the arguments being used by the business community: that this was a break on entrepreneurship; that this would keep companies from being able to hire good people; that this would destroy companies; that this would distort their earnings. All the arguments used by the business community were the ones set forth by Senator Lieberman in his opposition. …